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California May Ask U.S. for Loan

Gov. Arnold Schwarzenegger of California said Friday that the state, in a few weeks, could run out of cash to pay for basic services.Credit
Mike Blake/Reuters

LOS ANGELES — California, the nation’s most populous state and the world’s sixth-biggest economy, has warned the Treasury Department that it may need a $7 billion emergency loan from the federal government because it is running out of cash and has not been able to borrow more.

State officials said they hoped that the $700 billion federal bailout of the financial system approved by the House of Representatives on Friday would help open credit markets that have balked at providing the kind of short-term financing California and other states and local governments routinely rely on to keep operating.

But Gov. Arnold Schwarzenegger, a Republican, said at a news conference on Friday that the state “is not out of the woods yet” and in a few weeks could run out of cash to pay for basic services.

Mr. Schwarzenegger had sent a letter on Thursday night to Treasury Secretary Henry M. Paulson Jr., warning that the state might be forced to seek the emergency loan.

The letter was seen by some financial experts as an attempt to pressure lawmakers in Washington to approve the plan, which President Bush signed Friday. But the underlying credit problem is real and coming into glaring focus, state officials and outside analysts said, not only for California but also for several other states and local governments. In his letter, Mr. Schwarzenegger wrote that the situation in California was so acute because the state’s “short-term cash flow needs exceed the entire budget of some states.”

Creditors, shaken by the economic turmoil, are not providing the kind of short-term financing that governments, normally safe bets, depend on to stay afloat until tax revenue is collected.

“There may have been a little gamesmanship, a little pressure put on Congress to make sure the bailout passed,” said Sujit M. CanagaRetna, a fiscal analyst at the Council of State Governments, a research group. “But there is no doubt there is a severe credit crunch.”

Massachusetts, he said, recently fell $170 million short of the $400 million it had sought in the credit market to make a routine quarterly aid payment to cities and towns. Louisiana and New Mexico both postponed multimillion-dollar bond sales in the face of the quivering market.

The problem, he said, may grow worse as 15 states besides California, including New York and Connecticut, work to fill several billion dollars in funding gaps that have emerged this fall.

In his letter, first reported by The Los Angeles Times, Mr. Schwarzenegger said, “California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing.”

Treasury officials said they were reviewing the letter.

If California follows through on a $7 billion request, the loan, the equivalent of $192 for each resident, could surpass the federal government’s bailout of New York City in 1975 as it teetered on bankruptcy. After initially refusing, the federal government eventually provided $2.5 billion in federal loan guarantees that helped the city recover.

Still, Mr. Schwarzenegger and state officials said they viewed such a loan as a last resort in the event the government recovery plan did not sufficiently unlock the credit market.

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“It is hard to get that loan” in the markets, Mr. Schwarzenegger said. “If we can’t get that loan through the normal course, we will go through the federal government, and we already set that in motion.”

Asked what would happen if the markets or the government did not come through, Mr. Schwarzenegger replied, “This is no such thing in my vocabulary as, ‘what if not.’ We will.”

Mr. Schwarzenegger plans to meet on Saturday morning with John Chiang, the state comptroller, to discuss the problem, and to gather next week with legislative leaders to strategize.

Bill Lockyer, the state treasurer, had warned Wednesday that as Congress debated the rescue plan, the state had been locked out of credit markets for the past 10 days. “The credit market is frozen because financial institutions are afraid to commit capital amid enormous uncertainty,” he said.

Mr. Lockyer also said the state’s cash reserves would drain completely near the end of the month, jeopardizing payments for teachers’ salaries, nursing homes, law enforcement and an array of other state-financed services. California’s 5,000 cities, counties and school districts, he added, would face the same fate.

In an interview on Friday, Mr. Lockyer said the state routinely received short-term loans in the fall to cover payments until state coffers refill in the spring from tax revenue and other sources. But the shuttered credit market has upended the system, he said, adding that even if the credit markets loosened, it could cost more to borrow. He noted that in the weeks leading up to the crisis, borrowing terms had increased.

Still, Mr. Lockyer said he believed the recovery plan would provide some relief and predicted that would be more likely than the government loan.

“No one likes looking over the precipice, but I think we’re O.K.,” Mr. Lockyer said.

Analysts said the credit problems in California in part reflected years of budget problems lingering from the economic downturn after the Sept. 11 attacks.

“The state’s failure to bring the state budget back into balance in good times left the state very vulnerable to the downturn it is facing this cycle,” said Robert Kurtter of Moody’s Investors Service.

Late in September, California adopted a $143 billion budget, 85 days overdue, after a protracted fight between Mr. Schwarzenegger and the Legislature over how to close a $15 billion gap.

The budget included some cuts in services. It also relied on accounting maneuvers and assumptions like voter approval to borrow $5 billion against future lottery revenue and to expand the state’s rainy-day fund to 12.5 percent of general fund expenditures, from 5 percent.

A version of this article appears in print on , on Page A10 of the New York edition with the headline: California May Need U.S. Loan Of $7 Billion. Order Reprints|Today's Paper|Subscribe